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Global Recession is Inevitable if Conflict Drags On

In: Finance

Economists are taking another look at their initial assessments of the conflict and the impact on the global economy, weeks after Russia began its full-scale invasion of Ukraine.

On Tuesday International Monetary Fund Managing Director Kristalina Georgieva advised the fund will cut its 4.4% global forecast for 2022 when it releases its fresh outlook next month.

Director Georgieva singled out the U.S. as having fairly strong fundamentals, while weaker economies will suffer a big shock from the turmoil in markets. Those with strong post-pandemic rebounds should be resilient, she said. The fund is fretting about 60% of low-income countries in or near debt distress.

A global economic downfall seems inevitable, unless the Russian petroleum supply shortfall can be contained, it appears necessary for the price of oil to increase substantially and to remain elevated for a long period of time to eliminate the excess demand for oil.

The IMF has a more positive outlook: the global economy should at least still see an expansion.

Two senior economists at the Federal Reserve Bank of Dallas warned on Tuesday the world could be in for a recession longer than the one in 1991 caused by the oil shock following Iraq’s invasion of Kuwait. This contrasted with the IMF perception.

Right now, we are in the continued-conflict scenario and the euro area has the most to lose from this scenario, given its energy dependence, posing a difficult trade-off for the European Central Bank as it tries to control inflation while avoiding a recession.

The larger the blow to growth, the smaller the chances of the ECB starting to boost interest rates in 2022.

The Fed in the continued-war scenario would focus on risks to growth, raising the prospect of fewer rate hikes than expected.

As for the U.S., weaker exports to Europe and the hit from financial conditions, including lower stock prices and bigger premiums on corporate debt will pose a drag on the recovery, but the American shale industry would benefit.

In the heat of war, the outlook for the global economy is highly uncertain.

For the U.K. data earlier today showed the pace of consumer-price rises is now at a new 30-year high.

Chancellor Rishi Sunak will have a crack today at easing the U.K.’s cost of living crisis. Increases in inflation, energy, interest rates and taxes all serve as a backdrop for Sunak’s statement on the economy.

Sunak´s options include a cut to fuel duty and raising the threshold at which people start paying national insurance, a payroll tax that’s set to rise by 1.25 percentage points next month to pay for health and social care costs.

On Tuesday public sector finance statistics showed the budget deficit running 26 billion pounds ($34 billion) below official forecasts for the first 11 months of the tax year. This represents some good news for Sunak and the task he is embarking on.

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